Int Labor Org Wages Policy w-1

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C o n d i t i o n s o f W o r k a n d E m p

l o y m e n t P r o g r a m m e

Minimum wages policy

What is a minimum wage?

• The minimum amount that must be paid to the majority of the workers of a country, generally

on an hourly, daily or monthly basis;• and which is ideally fixed in such a way as to cover the minimum needs of the worker and

his/her family, in light of the prevailing national economic and social conditions.

How many countries have a minimum wage?

There is legislation regarding minimum wage fixing in more than 90% of countries.

What are the levels of minimum wages around the world?

• The level of the minimum wage in the lowest 20% of countries that have a minimum wageis US$57 per month, less than the two-dollar a day poverty line.

• The level of the minimum wage in the highest 20% of countries that have a minimum wageis US$1185 a month, about US$40 a day. This results in a ratio of 1 to 21 between thelowest and the highest minimum wage countries.

• In 10% of countries, the minimum wage represents less than one-fourth of GDP per capita,a very low figure per se. On average, the minimum wage represents two-thirds of GDP per capita.

• The median minimum wage in the world is US$213 a month or US$7 a day: 50% of countrieshave minimum wage rates below this figure.

How is the minimum wage fixed?

• A single minimum wage is set for the whole country (or by region) and is determined bythe state or a tripartite body (or, in very rare cases, by collective bargaining) in 61% of the

countries.• Sectoral and/or occupational minimum wages are set by the government or by a tripartitebody in 21% of the countries.

• Sectoral and/or occupational minimum wages are set through collective bargaining in 8%of the countries.

• A combination of two or three of the above systems of minimum wage fixing in 11 % of thecountries.

Information Sheet No. W-1 2006

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Are the social partners consulted on the minimum wage and

how?

The degree of consultation stipulated in the legislation can vary between none (government decides

alone) to the minimum wage being solely determined by the social partners (collective bargaining),as shown in the table below.

Degree of consultation % of countries

The government decides alone 10

The government consults the social partners separately 15

The government consults a bi/tripartite body 48

A tripartite committee sets minimum wages 18

Minimum wages are set through collective bargaining 11(The figures do not add up to 100, as some countries may have a mixed systems).

In practice, informal consultation processes often take place in cases where the legislation doesnot provide any obligation to do so.

According to what social and economic criteria is the minimum

wage adjusted?

In the vast majority of countries (80%), legislation specifies the different criteria to be taken intoaccount in reviewing and adjusting the level of the minimum wage. Two kinds of criteria are used:firstly, social criteria, such as the needs of workers and their families; and secondly, criteria relatedto economic factors. Criteria can sometimes conflict with each other. The table below showscommonly used criteria and their frequency: the most commonly used criteria of adjustment is thecost of living/inflation, used by 61% of countries, followed by the economic situation or development(51%).

Criteria % of countries using the criteriaSocial criteria:

The needs of workers and their families 32

Cost of living/inflation 61

General level of wages 35

Levels of social security benefits 14

Economic factors:

Economic situation and/or development 51

Capacity of enterprises to pay 16

Employment 26

Productivity 26

In 20% of countries, no criteria are outlined in the legislation.

How frequently is the minimum wage adjusted?

• In more than 60% of countries, the legislation does not provide for the frequency of adjustment of minimum wage rates.

• Less than one-fourth of countries require rates to be reviewed on an annual basis.• In reality, the minimum wage is often adjusted in line with the increase in consumer prices.

However, this adjustment frequently occurs at irregular intervals and often does not fullycompensate for the increase in consumer prices over time. In this case, the basket of goods and services which can be purchased by the minimum wage shrinks.



Who is covered by minimum wage legislation and who is

excluded?

The vast majority of wage workers in the world are legally covered by minimum wage legislation. This

is obvious from the examples of China, where virtually all wage workers are covered, and of India,where numerous unskilled occupations in the unorganized (or informal) sector are covered. Brazilalso has universal coverage, while in countries where the minimum wage is fixed through collectivebargaining, such as Denmark or Germany, the coverage level is generally high (respectively 90 and70% of all workers are covered in these two countries).

Yet, not all categories of wage workers are covered by minimum wage legislation. Amongst these,the situation of domestic workers and farm workers is of particular importance because they oftenform the bulk of poor workers. In some countries, domestic workers are entitled to minimum wageprotection (Brazil, China), sometimes at a reduced rate (Chile, Lesotho), while in others, they areleft without protection (Indonesia, Republic of Korea, Morocco, Tunisia, Sri Lanka). The same istrue for farm workers who benefit from minimum wage protection in India, Guatemala and SouthAfrica, but not in Botswana, Cambodia or Malaysia.

How is the minimum wage implemented and how much does it

cost not to pay the minimum wage?

The minimum wage is implemented through:• informing workers and employers of the minimum wage rates;• establishing sanctions to prevent and punish non-compliance;• setting up a labour inspectorate to supervize the wages being paid by enterprises.

Examples of sanctions (in addition to the payment of salaries due):

China 1 to 5 times the amount owed to the worker

FranceEUR 1,524 8 (US$1,270.70 – about 1.5 the monthly minimum wage)times the number of affected workers

Mexico Between 50 and 200 times the minimum wage

MozambiqueUp to 10 times the minimum wage times the number of affectedworkers

Seventy five per cent of countries stipulate fines for non-compliance ranging from one-fourth to 200times the minimum wage.Fifteen per cent of countries provide for fines and/or imprisonment (from six days to four years).For 10% of countries, no provision could be identified.

What are the current issues in minimum wage policy?

■ Does the minimum wage reduce the level of employment?The majority of studies conclude that the minimum wage has – at most – a small negative

effect on employment (there might even be a positive effect). This small negative effect shouldbe balanced with the positive effect that the minimum wage has on raising low salaries andincreasing consumption. However, the employment of vulnerable categories of workers (thesewith very low productivity, casual workers) might be at risk and requires special measures.



■ What is the effect of the minimum wage on wage inequality?The minimum wage is a powerful instrument in reducing wage inequality and raising the wagesof low-paid workers, such as youth, workers in non-unionized sectors workers, women andmigrant workers. Often wages which are slightly above the minimum wage tend to rise after the minimum wage has been adjusted, but there seems to be no effect on higher wages.

■ Does the minimum wage create public deficits and inflation?• A number of industrialized, transition and developing countries fix the level of basic old-

age pension and public sector wages according to the level of the minimum wage. Inthis case, a rise in the minimum wage can put pressures on public budgets and many of these countries tend not to adjust the minimum wage for this very reason. Originally, a linkbetween social benefits and the minimum wage was established to protect the level of theformer.

• The minimum wage may create inflation if it is adjusted on consumer price increase (CPI)and a minimum wage rise affects wages across the board. For that reason, the minimumwage is rarely adjusted on CPI in case of high inflation. However, the minimum wage isnever the primary source of inflation (whereas increase in the price of imported goods andexcess demand with respect to national productive capacity are).

■ What is the relevance of minimum wage policy in developing countries?• In many developing countries, the minimum wage is the only issue around which social

dialogue takes place, and this is because collective bargaining is weakly developed inthese countries. In cases where minimum wage consultations are the only forum wheretrade unions can make their demands known, there is a danger that the resulting minimumwage is not a genuine threshold but rather the actual wage earned by the majority of formalworkers. The only solution is to promote a well-structured collective bargaining system.

• The minimum wage establishes a wage floor against the payment of unduly low wagesin the formal sector which may also boost the demand for national goods. In the informalsector, the minimum wage may act in some cases as a reference wage with positive effectson informal workers’ earnings.

■ Does the minimum wage benefit poor workers?

In industrialized countries, a rise in the minimum wage is of more benefit to workers belongingto poor households than to rich households. That the minimum wage also benefits relativelymore well-off households is not a sign of policy failure: the very purpose of the minimum wageis to introduce a threshold in the labour market and prevent the payment of excessively lowwages. Its payment should not be made dependent on workers’ household income.

For more information

• ILO Conditions of Work and Employment Database available at www.ilo.org/travdatabase ,which provides information on minimum wages, working time and maternity protectionlegislation in more than 100 countries.

• F. Eyraud and C. Saget: (2005) The fundamentals of minimum wage fixing, Geneva, ILO,(http://www.ilo.org/public/english/support/publ/intro/index.htm).

• ILO Convention No. 131 on minimum wage fixing available at http://www.ilo.org/ilolex/english/convdisp1.htm.

Note: US dollar figures are in Purchasing Power Parity terms; by taking into account the differencein the prices of goods and services between countries, they indicate what can be bought in theUnited States with the minimum wage.

International Labour Office,Conditions of Work and EmploymentProgramme,4, route des Morillons,CH-1211 Geneva 22 Switzerland

Tel: +41 22 799 6754Fax: +41 22 799 8451e-mail: [email protected]/travailwww ilo org/travdatabase

Int Labor Org Wages Policy w-1

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